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I wrote a new piece about Cloud Company, this time from the service design point of view:

Internet dramatically lowers the coordination and transaction costs of cooperative action. As organizations decentralize elements of their infrastructure, service development, customer interaction, management, leadership and work related processes at the same time on the technological and cultural level, I would envision the emergence of a new form of organization: a kind of a Cloud Company.

I’m currently writing a book in cooperation with Sami Viitamäki to explore these ideas more deeply.Our Cloud Company blog will open soon in the future, opening a window to what we are working on. More about this later. Until then, let me know if you know of any good case examples where both distributed and transparent culture & technology have merged as a new and interesting approach to to do business.

How social media and digital working environments are really changing management, collaboration and organizations?

This is the question that is most interesting to me and I believe, very transformational in the long-term on how we relate to each other and how things get done.

I was happy to work on this question for a Finnish telecom operator, Elisa together with their VP of Corporate Customers, Pasi Mäenpää. As we know, the traditional operator business of selling subscriptions and connectivity is commoditizing and many plans are going flat rate. The value has moved upwards to the actual applications of communication technologies in the enterprise. Understanding corporate customers and their true business requirements and opportunities is increasingly important. This leads us to ask the question, how is the business environment and practices of organizations truly changing?

To grasp this question, together with my team we produced a video and a presentation on the future of organizations and management:

Cloud is the metaphor for the internet and Cloud Computing is the metaphor for a technological paradigm shift in the way how we utilize software and information. Google and Amazon particularly have been busy building the cloud. Practically it is an idea based on Technological Determinism, that technology would drive the development of society’s culture and social behavior.

An opposite view would see culture as a dominating force in technological development. Neither is accurate, as technology and culture are rather intertwining. Media theorist Marshall McLuhan famously said that “We shape our tools. And then our tools shape us.” What the cloud is shaping is our forms of organization, intertwingled by technology and culture. The internet will dramatically lower the transaction costs of doing business. As companies decentralize various layers including infrastructure, R&D, marketing and sales, they eventually empower a new form of organization to emerge: the Cloud Company.

Management traditionally can be defined as effective communication, efficient coordination and someone taking responsibility of the actions. Manager communicates to subordinates, coordinates resources, supervises operations and takes (and gives) responsibility. This is mirroring the typical hierarchical thinking of organizations.

What happens today in digitally distributed collaborative networks is that communication becomes the means between people, coordination is the distributed peer-production activities among the people and responsibility is something that people will have the ability to take because of transparency of activities and open information. Thus the idea is that in organizations today all effective communication, coordination and taking of responsibility needs to be digitally distributed in order to remain viable.

There are two ideas on how effective organizations work. One that is based on complete centralization and the other based on complete decentralization. Most organizations are more or less different variations of the two.

Centralizated Organizations

A completely centralized organization is centrally planned and hierarchical in nature. The idea is that efficiency requires conscious coordination of resources and division of labor. Communication relationships and channels are pre-defined and planned – who reports to whom, what paper goes from here to there. This is the world dominated by bureaucracies, hierarchies, command & control and people as cogs in the machine.

Lenin tried to run Soviet Union like a big factory, as a centrally planned economy (or command economy). It was the most Fordist and Taylorist system ever envisioned. Everything would be centrally coordinated. The problem of such big hierarchies is that internal coordination costs increase as the size of the organization increases.

Over time it gets increasingly hard to predict the future and efficiently adapt to changing conditions. If internal coordination costs are higher than the value created and generated, the whole system collapses to its own absurdity. This economic calculation problem led to major problems in Soviet Union. Economic planners were not able to detect consumer preferences, shortages, and surpluses with sufficient accuracy. Resources were wasted and misallocated, eventually leading to the collapse of the whole house of cards.

Just like Soviet Union, most companies today are miniature centrally planned economies facing the same problems of internal coordination problems as the size of the hierarchy increases.

Decentralized Organizations

The father of modern economics, Adam Smith wrote in 1776 a revolutionary book, The Wealth of Nations. During the time his work was concentrated on supporting the political agenda of Great Britain to dissipate mercantilism, the economic reality that dominated Western European economic policies at the time. Mercantilism was based on a protectionist ideology of controlling import and export of goods for the nation’s good.

Adam Smith’s idea was that free market economy based on self-regulation would be more effective from the resource allocation point of view. Rational self-interest of individuals and companies in the short term would lead to common good in the long term. Competition and supply & demand in the context of rational self-interest would create economic balance.

The question then becomes, when does economic activity take place on decentralized markets and when do centralized organizations form as a necessity?

Lowering Transaction Costs

In 1991 economist Ronald Coase received the Nobel’s price on his theory of transaction costs. For a reference, take a look at The Nature of The Firm (1937). . When transaction costs increase, centralized organizations form to take care of the necessary side activities to achieve the goal. As transaction costs drop, certain economic activities are increasingly done on the open markets.

As an example, in the newspaper industry a photographer needs to take the pictures, journalist needs to write the story, an editor lays out the text, the printing press produces the publication and then someone takes care of the logistics of delivery. In the context of these activities there are other costs such as legal, marketing and administrative costs. All of these activities include high transaction costs that make it impossible to deliver such a product reliably without centralized coordination and organization.

As we know, Internet has enabled new forms of organization such as the Wikipedia or Huffington Post to emerge in the publication industry. Internet has radically reduced transaction costs involved in producing resources like an encyclopedia or a newspaper. According to Harward Law School Professor Yochai Benkler, digitally distributed collaborative environments have enabled a new form of organization to emerge between the traditional nation state and the private company, based on the logic of commons-based peer-production. In the open markets, people and organizations improve the common resources, eventually gaining more than their individual contribution is worth.

As companies thrive for higher value creation and move up in the economic food chain, it is impossible to do so today without lowering the transaction costs involved in producing these goods and services. Therefore all effective organizations today will utilize digitally distributed collaboration and management environments and practices, because of lowered transaction costs.

The Emergence of the Cloud Company

The next stage in running successful organizations is to understand that effective organizations today are operating closer to the logic of the open free markets. This means that companies thriving for higher value will decentralize many core layers that were traditionally centralized, including infrastructure, information storage and processing, collaboration, services, sales and customer service.

This stage will be driven by cloud computing, crowdsourcing, digital mass-customization (such as the iTunes App Store where each person actually creates the end product through individual customization), commons-based peer-production and other emerging decentralized models for carrying out work in the digital business ecosystem: therefore the name Cloud Company.

Here is how one company might look like, where certain organizational functions have been supported with internet-enabled decentralized models and technologies:

A Cloud Company (or real Enterprise 2.0) will be much more effective than its more or less centralized competitors, because it’s capable of distributing certain organizational activities on the market, operate in a much more customer-oriented and centered way, changes dynamically the costs of running the business, is capable of lowering transaction and internal coordination costs and utilizes latest social media and collaboration environments for digitally distributed communication, coordination and wide taking of responsibility.

Today, with social media, we stand on the threshold of an economy where the fundamental processes of communication and coordination are being transformed. Familiar economic entities are becoming increasingly irrelevant as the Internet, not the traditional organization, becomes the most efficient means to communicate, coordinate and exchange value.

The traditional sales funnel worked in a world where we had limited number of channels reaching a wide number of eyeballs. The advent of the internet has brought forward a myriad number of alternative channels. As a result if you ask someone on the street, a random TV advertisement today is remembered by far less number of people than what the same advertisement would have gathered in the 60s.

Traditional Sales Funnel (ref: Forrester Research)

Someone walking with a mobile phone in a shopping mall is no longer in the shopping mall, but impulsively dodging things that come by as the mind is somewhere else than in the physical realm. Someone scanning Twitter on a mobile phone while in a restaurant is no longer in the restaurant either, but lured into an endless flow of retweets.

“What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention.”
– Social Scientist Herbert Simon (1971)

Due to blogs, Twitter, Facebook, podcasts, information aggregators, news radars etc. our attention is now highly fragmented. Traditional mass media channels no longer have the same control as they used to have. Attention Economy is an economy where our attention has become scarce and fragmented, unfocused and disoriented, something Linda Stone calls Continuous Partial Attention (CPA): we only pay partially attention to what goes on around ourselves as we scan different channels for new opportunities, barely paying attention to things around us.

It is no surprise that the AIDA model (Attention + Interest, Desire + Action) from the end of 19th century is no longer as relevant as it used to be. In 2007 Forrester Research suggested that engagement is the new metric. They said that the traditional sales funnel based on awareness is broken and no longer works in digital media. In place they suggested a labyrinth depicted below, showing contributors as one potential outcome:

The New Funnel According to Forrester Research

The complexity of this picture sure doesn’t look very welcoming to managers who want command and control, predictability and assurance for their marketing euros. What ever may be the case, the reality is that customers on the internet now have a wide variety of opportunities and low threshold to gain second hand opinion.

The labyrinth can be understood in many ways. Here is mine:

Non-linear Inverted Funnel (ref: Teemu Arina)

Shifting from company perspective to customer perspective, things get highly non-linear and could go towards any path, not just the one the company depicted to be their sales funnel in the first place. From this perspective many sales funnels companies employ are delusional and grounded in false belief systems regarding the linearity of the purchase process and miss the beauty of the complexity involved in decision making. Taking the point of view of the customer reveals insightful details about the process:

Searching & Browsing: over 80% of browser sessions start with a search. Over 90% of people search online while considering a major investment like a digital camera, a trip or a car. Search is the primary means through which people start browsing the web.

Recommendations & Persuasion: As soon as one fires a search, conversation appears. Forums full of second hand advice start to influence our decisions. Some people out there have a vast amount of knowledge and their opinions persuade our own opinions.

Reinforcement & Sacrification: New information enforces our expectations but makes us also sacrifice initial assumptions, as new information emerges from the conversation.

Usage & Value Creation: One decides to get involved with a solution or product. Usage reveals new requirements and reveals non-predetermined unexpected benefits. Value is created through the way how a solution is actually used, not what it appeared to be in the first place.

Value Recognition & Self Expression: One starts to recognize the true, deep and hidden value the solution represents. You may as well call it wisdom in the context of using the product. Self expression leads to recommending and persuading the decisions of others: fancy details and complex reviews are being revealed to others on internet forums.

A friend of mine, Anssi Mäkelä from Nokia did a little mystery shopper experiment. As an avid Nike fan, he was looking to buy a pair of running shoes from the internet and took a screenshot of each website he visited in the process. Out of the around 180 screenshots only two were from websites owned by Nike. He only went to their website to have a feel of the products, as is the case with high-definition digital advertising.

The word engagement is so deep that it has even made itself to the values of Nokia. In their lobby I saw a banner reading “engaging consumers“. the same words insisted by a marketing person from Louis Vuitton in a conference talking about social media and how it relates to their brand. What this is to me is an oxymoron: active engagement and passive consumption do not go into the same sentence without a logical conflict.

“56% of American consumers feel both a stronger connection with, and better served by, companies when they can interact with them in a social media environment.”
– Center for Media Research (2008)

The potential buyer no longer comes through the front door to be lured through various steps to become a customer. Because of Google, he is entering through any door he wants instead – even a window or a backdoor – armed with the opinions of his peers carried over from the conversations along the road. As he starts to use the product, he starts to speak to other customers about the true benefits and deficits of the product: even dodging manuals to hack the product to make it what one wants, as has happened at Ikeafans.com.

From this perspective, the word consumer describing passive behavior is no longer valid. Alternatives have been suggested for the new era of participation, such as produsage and prosumerism. In any case what we are actually talking about is empowerment. The customer is not just engaged, but in an ideal situation is empowered to go beyond the product: rate, comment, converse, feed forward, troubleshoot and hack the product in the context of other empowered customers.

Give a man a fish and he is engaged. Give a man a fishing rod and he is empowered.

Smart companies know how to leverage co-creativity. Such is the case with MyStarbucksIdea.com, understanding the importance of customers as active participants in product and service development processes. The value thus is created in interaction and not embedded in the product and production processes alone. This is what Esko Kilpi talks about in his blog about interactive value creation.

Sales funnel is a selfish concept utilized by companies who are mainly interested in themselves. Words like “capturing leads”, “lead acquisition”, “customer retention” and “engaging consumers” are concepts emerging from looking inside-out from oneself as a company, rather than outside-in.

Smart companies switch off their corp-ego-centric world view and make customer-centricity a true value evidentin their tactics in practice, not just an empty shell in their mission statement. To push the boundaries a little bit, attention and awareness are also selfish concepts. The true currency is not attention but the intention of your customers: intent to do something, not just attention to marketing messages. In an Intention Economy, customers are empowered participants.

“We see our customers as invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better.”
– Jeff Bezos, CEO of Amazon.com

In Finland we have witnessed the emergence of a decentralized virtual organization called Sometu (sosiaalinen media oppimisen tukena – social media in support of learning). This (dis)organization consists of over 3000 teachers, researchers and other people interested in social media in education. Sometu was formed in the end of 2007 and has grown rapidly since. Their main tool is Ning, but they use a wide variety of other social media tools to carry out educational experiments.

Now that Ning is going more commercial and social media conversation is becoming more overheated and tiring on the educational sector, people like Teemu Leinonen (at ITK-conference) and Tarmo Toikkanen have started to question the aim of Sometu and its mission. Sometu has started to live a life of its own as an echo chamber for educational social media fanatics with their own little experiments with a questionable degree of impact. With a more clear purpose such a (dis)organization could become much stronger and meaningful force in transforming the educational sector. Will it be capable for this?

With great interest I read Dave Pollard’s post on the Lifecycle of Emergence. He talks how intrigued he is of “flow” models depicting the dynamics and cyclic nature of complex systems. He talks about the details of his discovery of Meg Wheatley and Debbie Frieze’s (Berkana Institute) model of Lifecycles of Emergence and explains the model with the following picture:

The Lifecycle of Emergence. Illustration: Dave Pollard, original by Chris Corrigan

When I saw this picture Sometu network immediately came to my mind. As I see it, it was set up by pioneers who named the network. Then it started rapidly evolving as a network as other enthusiasts joined, eventually emerging as a community of practice for using social media in educational practice. A lot of attention and success stories were built, illuminating the (dis)organization’s activities. As more newcomers joined and as the activity and transparency of the group’s activities grew, it became a major system of influence for educational transformation – until someone said that the emperor wears no clothes.

As with anything, technology is like a chair without two legs if the cultural transformation underlying it is missing or unclear for the user. If things get technologically driven – as Sometu seems to be too much so for some people – the question then becomes what is the cultural innovation behind the scenes. This could be concentrated as a mantra, mission or vision for such an organization, but such statements may become empty in meaning.

Influencing real change in education is exceptionally hard. Networks like Sometu need to carefully examine the real competencies they have and focus on those to avoid decline and jump to a new cycle of opportunities. This will be hard, especially if even the originating founders don’t know themselves what would be the forces that will keep their vague network together in the future – simple interest in tools for education is not enough.

Six Thinking Hats is a well known brainstorming method designed by Dr. Edward de Bono. Six Hats aims to help a group to think more effectively. The idea is to use different hats symbolically, in order to take different productive points of view to a conversation such as positive thinking, information & fact driven argumentation and critical judgment.

But what would be the opposite of Six Thinking Hats, points of view to a conversation that would be damaging and non-productive from the group effort point of view. Something that would eventually bring the conversation to a halt, a dead-end or even a fight? On a long lunch today with my colleagues we designed just that.

Six Non-Thinking Socks

How to destroy a potentially fruitful conversation and brainstorming session by just being present.

1. White Socks – Direct Interruption

What ever is being said is being interrupted by speaking over and loud. If someone starts to interrupt you too, just rise your voice and continue.

2. Red Socks – Getting Personal

Every point that is provided is cleverly turned into a personal assault targeting the character and personality of the fellow team player.

3. Black Socks – Unthinking

Use every logical fallacy in the book to confuse the conversation with arguments that first sound reasonable but turn out to be totally flawed in the very details.

4. Yellow Socks – Blatant Ignorance

When someone is speaking, just pretend that you are not listening. Look at the walls, at your clock and knock your fingers on the table. Moan.

5. Green Socks – Extreme Pessimism

It is the worst possible day of your life. Everything that is being said is viewed through lenses of absolute negativity and likelihood for failure. Cast a dark shadow on the whole conversation and start speculating what could most possibly go wrong.

6. Blue Socks – Unreasonable Haste

You are in such a hurry that there is no point in thinking about anything longer than a second – maybe two on a good day. No time to think – decisions are made based on intuition alone.

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So, there you have it. Not too far away from your typical meeting.

Now go on and use this method in your next meeting and report back the results!